When a partner enters into a sale or exchange of their partnership interest, there are often lurking tax surprises—such as unexpected phantom income triggers. Sales of partnership interests are notoriously fraught with potential tax traps for the unwary. It is, in fact, even possible to trigger more tax on a sale than one receives in exchange for the interest in the partnership.

​One of the more common lurking issues involves triggering income from so-called “hot assets,” often in the form of “unrealized receivables” held by the partnership. The scope of “unrealized receivables” is deceptively wide, and can include partnership attributes such as depreciation recapture, mining property, and a host of other items.

Moreover, to add insult to injury, the Code provides that “recapture income” is not eligible for installment method reporting. Thus, where a partnership interest is sold in exchange for payments over time, part of all of the transaction may not qualify for installment method reporting, requiring that the income related to the “recapture income” be reported immediately (i.e., as phantom income if the reporting of the income does not match the actual receipt of the payments).
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